In its latest "Portfolio Manager Commentary: Overview, Strategy, and Outlook research piece, the $157 billion Wells Fargo Advantage Funds discusses supply and rates in the money markets with a focus on commercial paper, ABCP, and municipal variable-rate demand notes. We excerpt from the article below.
Under "Surveying the Landscape," Wells Fargo writes, "The lack of supply is one of the dominant topics of conversation in the money markets. Issuers have found it both desirable and possible to extend the term of the debt issuance into the longer part of the money market curve and into the bond markets. A conflict exists as regulators overseeing the issuers are encouraging them to issue longer, while potential new money fund regulations encourage money funds to stay short in order to boost liquidity.... `One of the major contributors to the improvement in the financial markets continues to be market participants' willingness to take more risk, especially in terms of the duration of their investments."
They also comment, "Potential changes to the accounting treatment of asset backed securities (ABS) threaten to drop ABCP outstandings even further. On June 12, 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 166, ... and SFAS 167.... These standards will come into effect next year and will change accounting for securitizations and off-balance sheet financing. The impact of both FAS 166 and 167 will make off-balance-sheet treatment of ABS and ABCP more difficult to achieve.... The ABCP and ABS markets will most likely continue to shrink with fewer transactions, as the economics for domestic financial institutions become less attractive to finance assets off the balance sheet."
Wells' Dave Sylvester writes, "With the improvement in the tone of the markets, the programs designed last fall to support the money markets continue to decline in importance. The main programs in this sector are the Commercial Paper Funding Facility (CPFF) and the Asset-Backed Commercial Paper Money Market Mutual Fund Lending Facility (AMLF).... With only about 1% of the total CP now owned by the Fed, we expect that both of these programs will be allowed to expire in their present forms as scheduled on February 1, 2010."
The company says of its funds, "Our focus remains on liquidity and maintaining a stable $1.00 net asset value (NAV). In our prime-category money market funds, we have been able to use our highly liquid position to selectively purchase longer-dated investments. Most of our short-term investments have been made in the one- to three-month maturity sector, with some selected purchases in longer-dated paper, where those investments are consistent with the primary objectives of the funds. As rates have compressed, municipal variable-rate demand notes (VRDNs) are sometimes offered higher yields than taxable investments of a comparable term, and we continue to add to that sector on an opportunistic basis. While we have increased the weighted average maturities of our portfolios somewhat, they remain well below the industry average."
Finally, Wells says, "We will in all likelihood face a prolonged period of low interest rates in the money markets. As investments purchased in the past at higher rates mature, money fund yields will continue to decline. With yields at record lows and credit spreads narrowing, we believe that this is the wrong time to be chasing yield. While we take the Federal Reserve at its word when it tells us that rates may remain low 'for an extended period,' there are some signs globally that central banks are beginning to reverse course, or at least contemplate doing so.... Attempting to increase yields by increasing maturity seems to be taking an inordinate risk at this point. Rates will inevitably rise, and this might necessarily require more emphasis on liquidity and a stable $1.00 NAV."
